The Advisor’s guide to managing volatility

Volatility in 2025: Heightened, but not unprecedented

For clients, this year has been a bit of a bumpy ride. From tariffs and geopolitical instability to interest rate uncertainty and surprises like the DeepSeek artificial intelligence (A.I.) bombshell, there have been no shortage of developments to spark sharp market reactions—and, at times, overreactions. But amid the ups-and-downs, it is important to consider that, from a historical perspective, market gyrations in 2025 have not been unprecedented, even if they have sometimes felt that way.

The biggest volatility spike we’ve seen in the first half of 2025 occurred after the announcement of U.S. President Donald Trump’s “Liberation Day” tariffs in early April, when the CBOE Volatility Index (VIX) peaked at just over 50. While this is a significant spike, it fell well short of the highs reached during the 2020 COVID-19 pandemic and 2008 Global Financial Crisis (when the VIX exceeded 80), and was also brief compared to the more sustained volatility experienced during those two crises.¹ In general, periods of heightened volatility tend to come on fast but be short-lived; since 2022, every sharp rise in volatility has been followed by a rapid return to pre-spike levels, as demonstrated in the chart below. For Advisors and clients, the message is clear: even when volatility rises, there is no need to panic.

Equity volatilty tends to rise fast but never sticks long

Source: BMO GAM, Bloomberg, as of June 6, 2025.

Volatility outlook for the second half of 2025

For investors and companies alike, uncertainty remains an overarching theme. When Trump’s tariffs were first implemented, companies got spooked, especially since it appeared that some of the United States’ closest allies—including Canada and Mexico—were getting hit the hardest. Trump’s “Liberation Day” tariffs further escalated global trade tensions, as has the ongoing trade dispute between the U.S. and China. While 90-day pauses on many of the new tariffs calmed the situation temporarily, it remains unclear what will happen after those 90-day deadlines expire, and the recent court battle over the legality of Trump’s tariffs has complicated the situation even further.

Amid this uncertainty, companies simply don’t know what to do—they don’t know what their input costs will be, they don’t know where they should be manufacturing their products, and they don’t know whether they should be investing in growth or tightening their belts. As a result, much of the forward guidance provided to investors has been vague or evasive, with some companies taking their best guess at a most likely scenario, some offering multiple possible scenarios, and others avoiding guidance entirely. This has contributed to even greater uncertainty for investors, who rely on this guidance to calibrate their expectations.

Looking ahead to the second half of 2025, there are some positive signs. For now, the trade situation is somewhat calmer than previously—though, as previously mentioned, the expiration of the 90-day pauses still looms later this summer. We continue to expect the U.S. Federal Reserve (Fed) to step in with at least one interest rate cut before the end of the year, though the possibility that the Fed could remain on the sidelines remains a risk. And economically, the United States is still holding up fairly well despite some signs of gradual weakening. In particular, it is significant that we haven’t seen unemployment rise sharply, which would be a major warning sign, and data from credit card companies haven’t yet shown any major decline in consumer spending (though there has been some slowing in the entertainment and travel industries). In our view, markets’ nervousness hasn’t been a reaction to the economic data itself, but rather to the expectation of what could happen to the economic data if trade wars were to persist.

Overall, we believe it’s unlikely that market volatility will return to post-“Liberation Day” highs in the near future, as that point represented the peak of trade-related risk. But we also don’t expect volatility to necessarily stay as low as it has been more recently. There is still a great deal of work to be done on the trade front, especially with regard to ongoing, complex negotiations between the United States and China. While more deals may be announced, there are still other priorities on Trump’s agenda, which means that more surprises could come through. Spurts of volatility are likely for the remainder of the year. The recent conflict in Middle East and its impact on oil prices is just the most recent example. Ultimately, however, we believe that it is still a good time to be invested in markets, especially given the relatively resilient U.S. economy and the likelihood that the Fed could jump in and cut rates if further signs of economic weakness do appear.

Managing volatility in multi-asset portfolios

In our multi-asset portfolios, we’ve taken a very risk-aware approach, employing multiple different tactics to manage volatility and create an asymmetrical payoff profile, in which we maintain our upside potential while limiting our downside exposure. These include:

1. Being nimble in our asset allocation decisions. At the beginning of the year, we were overweight equities, but as trade risk increased, we gradually reduced that exposure, taking some profits when markets jumped.
2. Utilizing options. In particular, we purchased options on the semiconductor space, correctly surmising that markets would get nervous as U.S.-China trade tensions increased.
3. Using low-volatility strategies. While options work well in the short-term, for longer-term volatility management, we do invest in some dedicated low-vol (i.e., low-beta) solutions.
4. Maintaining a defensive allocation to gold. Additionally, we purchased some put options on gold in case prices fell.
5. Adjusting our geographic allocations as necessary. These changes, as well as all of our other asset class views, can be seen each month in the BMO GAM Monthly House View.

What Advisors could do to manage volatility

Most client portfolios include a variety of assets, some of which are prone to volatile swings while others are not. In our view, a good way to manage a portfolio with respect to volatility—especially for clients that are particularly sensitive to the ups-and-downs—is to look for opportunities while also identifying areas to reduce risk. This goes not only for your client’s equity sleeve, but also for their fixed income sleeve, currency exposure, and so on. We also suggest closely monitoring macroeconomic developments that could directly or indirectly impact your client’s portfolio, including the interest rate outlook, political situation, and overall economic picture. Remember: when markets get spooked, that’s often when the best opportunities present themselves.

One way to accomplish these goals is to partner with a trusted fund manager who can do some of the work for you, like BMO GAM. We offer a full suite of actively-managed ETF portfolios suitable for a variety of risk profiles,² as well as a range of dedicated low-volatility strategies that may help to smooth out the ride for your clients.

ETF Portfolios

Low-volatility strategies

Please contact your BMO Global Asset Management wholesaler for any additional support and guidance.